Coronavirus and Force Majeure: How Are Your Contracts Being Affected?
As Covid-19 spreads globally, problems with the manufacturing and supply chain have resulted in difficulties for businesses in fulfilling their contractual obligations.
The outbreak of coronavirus (Covid-19) is causing considerable uncertainty for businesses around the world. The main impact legal experts are seeing relates to the manufacturing and supply chain, which has resulted in difficulties for businesses in fulfilling their contractual obligations.
Businesses who have been affected are now seeking to understand their rights and obligations and any relief that might be available to them. Often, the first thought that comes to mind in such circumstances is a force majeure clause, typically agreed upon between parties in B2B contracts and designed to allow a period of relief in performance where circumstances arise that are beyond their control. There are several issues to consider before invoking a force majeure clause, some of which we have set out below as an initial guide.
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Do you have a force majeure clause?
You will only be able to rely on a force majeure clause if one is included in the relevant contract and it applies to you. English law does not imply force majeure relief into contracts that are silent on the matter.
Can you rely on your force majeure clause in the circumstances?
Simply because a force majeure clause exists (and operates in your favour), doesn’t necessarily mean you have the right to invoke it in all situations. Force majeure clauses are typically drafted to include specified events (often called force majeure events). Whether the current situation constitutes a force majeure event is a matter for interpretation that requires specialist legal advice. It is unlikely that your clause envisages coronavirus COVID-19 specifically, however it may specify events such as pandemics, epidemics, and work stoppages, in which case you may find it possible to argue that the outbreak constitutes one or more of these specified events.
If your force majeure clause is particularly favorable to you, it may have been drafted to include events such as:
- Compliance with a law or governmental order, rule, regulation, or direction
- Any action taken by a government or public authority, including imposing an embargo, an export restriction, or other restrictions or prohibitions
- Delays by suppliers or materials shortages
- Difficulty or increased costs in obtaining workers, goods or transport
- Other circumstances affecting the supply of goods or services
It is also wise to consider how the outbreak is being classified by bodies such as the World Health Organisation at the time you’re seeking to invoke the force majeure clause, as this may or may not support your argument or claim.
Force majeure clauses typically include a requirement for the party seeking relief to show that the event could not have been mitigated by preventative action. This demonstrates the point that force majeure may only be invoked when the relevant event has prevented execution of the contract, not simply that the event exists, has caused economic hardship, or that execution has become difficult or commercially undesirable.
Certain government agencies around the world have begun to issue "force majeure certificates" to some businesses in an attempt to prevent or stall breach of contract claims and limit liability.
Should you invoke your force majeure clause?
- This question involves careful consideration of the circumstances. The following non-exhaustive list contains some of the matters you should consider:
- Force majeure clauses typically include a right for the unaffected party to terminate when the event has continued for a specified period of time. Although claiming force majeure relief may seem immediately beneficial to your business, it may have unintended consequences, such as triggering termination rights for your customers.
- What do the contracts say? Do not assume or guess the language of the relevant contracts. No force majeure clause is the same; therefore, a one-size-fits-all approach will not work. Each relevant contract must be reviewed by a specialist contract lawyer.
- Have you communicated with your customers and suppliers? As the outbreak continues to affect global trade and the number of cases and countries involved is increasing, it may be that simple communication will suffice without the need to resort to legal action.
- There may be other remedies available to you in addition to a force majeure claim.
How do you invoke your force majeure clause?
Force majeure clauses typically set out a procedure that must be followed to effectively claim relief under the clause. You should obtain advice before invoking the clause to ensure that you have properly complied with that procedure. Recent case law suggests that failure to comply can jeopardise subsequent legal claims.
When faced with such circumstances, it is advisable to have each affected contract reviewed in its entirety, as there are likely to be several terms that are impacted, including but not limited to exclusivity, liability and liquidated damages, delivery and termination rights, change control regimes, governing law, and jurisdiction.
Adam Kelly is an associate at the commercial and technology practice in Dla Piper, Liverpool, U.K.